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PETER SCHIFF

Saturday, June 14, 2014

Debt is No Salvation

Posted by Peter Schiff on 06/13/2014 at 6:40 AM
Thus far 2014 has been a fertile year for really stupid economic ideas.
But of all the half-baked doozies that have come down the pike (the
perils of "lowflation," Thomas Piketty's claims about capitalism
creating poverty, and President Obama's "pay as you earn" solution to
student debt), an idea hatched last week
by CNBC's reliably ridiculous Steve Liesman may in fact take the cake.
In diagnosing the causes of the continued malaise in the U.S. economy he
explained, "the problem is that consumers are not taking on enough
debt." And that "historically the U.S. economy has been built on
consumer credit." His conclusion: Consumers must be encouraged to borrow
more money and spend it. Given that Liesman is CNBC's senior economic
reporter, I would hate to see the ideas the junior people come up with.

Before
I get into the historical amnesia needed to make such a statement, we
first have to confront the question of causation. Just as most
economists believe that falling prices cause recession, rather than the
other way around, Liesman believes that economic growth is created when
people tap into society's savings in order to buy consumer goods that
they could not otherwise afford. But consumption does not create growth.
Increasing productive output allows for greater consumption. Something
needs to be produced before it can be consumed.

But even
allowing for this misunderstanding, consumer credit does little to
increase consumption. All it accomplishes is to pull forward future
consumption into the present (while generating a fee for the banker).
This is like giving yourself a blood transfusion from your left arm to
your right. Nothing is accomplished, except the possibility of spilling
blood on the floor. But it's not even that benign.
If, for instance, a
consumer borrows to take a vacation, the debt will have to be repaid,
with interest, from future earnings. This just means that rather than
saving now (under-consuming) to pay in cash (which under normal
circumstances would earn interest and defray the cost) for a vacation in
the future, the consumer borrows to vacation now and pays for it in the
future. But shifting consumption forward can only create the illusion
of growth.read more @ http://www.schiffradio.com/b/Debt-is-No-Salvation/-692668181496006166.html

Peter Schiff is a well-known commentator appearing regularly on CNBC, TechTicker and FoxNews. He is often referred to as "Doctor Doom" because of his bearish outlook on the economy and the U.S. Dollar in particular. Peter was one of the first from within the professional investment field to call the housing market a bubble. Peter has written a book called "Crash Proof" and a follow-on called "The Little Book of Bull Moves in Bear Markets". He is the President of EuroPacific Capital, which is a brokerage specializing in finding dividend-yielding, value-based foreign stocks.

Peter Schiff is a well-known commentator appearing regularly on CNBC, TechTicker and FoxNews. He is often referred to as "Doctor Doom" because of his bearish outlook on the economy and the U.S. Dollar in particular. Peter was one of the first from within the professional investment field to call the housing market a bubble. Peter has written a book called "Crash Proof" and a follow-on called "The Little Book of Bull Moves in Bear Markets". He is the President of EuroPacific Capital, which is a brokerage specializing in finding dividend-yielding, value-based foreign stocks.